The Soft Life Is Over For Thai Banks

As Chartsiri Sophonpanich enters a hallway in the headquarters of Bangkok Bank Ltd., dozens of employees melt away and clear a path, bowing with hands folded upwards in the traditional "wai" greeting. At 36, Chartsiri is the president and heir apparent to Thailand's biggest and most powerful banking fortune, a Sophonpanich fiefdom for three generations.

Outside headquarters, though, the attitude is getting much less deferential. Determined to turn Thailand into the financial hub for the newly opening economies of Indochina, the government's technocrats are dismantling the privileges that have allowed Bangkok Bank and a handful of other ethnic Chinese banking empires to grow into hugely profitable money machines (table).

HEATING UP. Foreign banks, insurers, and credit companies are getting greater access to the booming domestic market for everything from car loans to corporate finance. A host of local finance companies and securities companies, meanwhile, are being unleashed to compete in mortgages, credit cards, mutual funds, and bond underwritings. To fight back, the big banks are scrambling to redesign branches, beef up marketing, and offer more services at automated tellers.

But the government is going to keep turning up the heat. Over the next five years, as many as seven more foreign banks will be permitted to open branches, while the 15 now operating in Bangkok will be able to expand nationwide. Domestic finance companies will be allowed to compete in many more businesses, such as trading foreign currencies and managing public pension funds. "It's going to be a whole new world," crows Prapat Srisatayakul, a managing director of Finance One Ltd. With $3 billion in assets, the firm is Thailand's leading underwriter of stock and bond issues, as well as a major provider of car loans.

Even the turmoil rocking global financial markets this year has failed to halt the authorities' deregulatory zeal. In fact, the government's master plan was unveiled on Feb. 27, just as the Barings PLC debacle was unfolding, and little more than a month after speculators launched an attack on the Thai baht in the wake of the Mexican currency crisis. Investors in Thai stocks also have been whipsawed: Foreign mutual funds pumped billions of dollars into Thai stocks in late 1993, only to yank them back out last year, sending the Stock Exchange of Thailand index down 32%, to around 1155.

But while economists from Latin America to India are reassessing the merits of free capital flows, Thai authorities believe their best hope is to keep pushing forward, step by step. For one, Thailand needs the money. Even with the country's enviable savings rate of 35% of gross national product, it will need about $30 billion in foreign capital over the next five years for infrastructure projects such as telecommunications, mass-transit systems, and power plants. "We have to admit we are living in the real world, and the global trend is toward liberalization," says Somchai Richupan, director general of the Finance Ministry's Fiscal Policy Office.

Bolstering the government's confidence is the fact that so far, Bangkok Bank and the country's other established banks have proved they are no pushovers. If anything, they--not the foreigners--have been the biggest winners in the reform process. Citibank, for example, still dominates Thailand's market for foreign credit cards such as Visa and Mastercard, with about 300,000 subscribers. But Thai Farmers Bank Ltd. and Bangkok Bank, which offer their own domestic cards, are now just as big in combined market share.

The same is true in the lucrative market for home mortgages, where Citi was able to steal a march on local institutions by grabbing the lucrative market for upmarket single-family houses. Now, however, there are five or six Thai competitors. "They now are well aware of what the banking world is like outside Thailand," says David L. Hendrix, Citi's country manager. "They also have hired away a lot of our people."

FAT MARGINS. The numbers help tell the story. Despite years of gloomy predictions, profits at Thailand's 11 commercial banks have risen steadily since 1990. Return on equity has risen from 18% to 24% since 1990, while return on assets has nearly doubled to a solid 1.8%. The reason: Most banks have been maintaining fat margins by slashing operating costs and going offshore to get lower-cost capital. They've also boosted fee-generating income from services such as credit cards and trade financing. "They're all in great financial shape," says Paul Ensor, director of Thai securities for UBS Securities (East Asia) Inc.

When will the gravy train come to an end? Most analysts think the hard part will come in two or three years, when some of the key liberalizations will kick in. "The real competition will be when the foreign banks come in 1997," predicts Suwapan Senivongs Na Ayuthaya, Thai banking analyst with Credit Lyonnais (Asia) Ltd. "Margins will fall, and fee income won't keep up."

Fortunately, institutions such as Bangkok Bank, with $32 billion in assets, already have a decade of experience in dealing with rapid change. Founded in 1944 by Chin Sophonpanich, an immigrant from China, Bangkok Bank went on to become a key financier of ethnic Chinese tycoons who dominate the economies not only of Thailand but also of Malaysia and Indonesia. Often, big loans could be quickly arranged with a phone call to Chin.

After a major property bust in the mid-1980s left it with massive defaults, Bangkok Bank has become much more professional in its lending. It also has had to professionalize to compete against big foreign banks boasting global networks and low capital costs. "The nature and complexity of the business is changing a great deal," says Chartsiri, who graduated in 1982 from Massachusetts Institute of Technology. "In the past, we dealt with corporate customers on a relationship basis. Now, we have to pitch for deals."

Not that those relationships are worthless. The bank's old ties with Chinese merchants in Malaysia, Hong Kong, Taiwan, and even Vietnam figure largely into its regional expansion plans. Many of these customers are still turning to Bangkok Bank for trade finance and to back new factories springing up in China and Southeast Asia. Because of Thailand's proximity to the awakening economies of Burma, Cambodia, Vietnam, and Laos, meanwhile, it expects to be a heavyweight in Indochina.

And though it was slow to wake up to changing demands of consumers, the bank is starting to make big strides. A latecomer to the mutual-fund business, for example, Bangkok Bank decided in 1992 to launch open-ended funds when everyone else sold only closed-end funds. It now dominates this niche. Two years ago, it introduced 24-hour automated tellers. Besides withdrawing money, customers using its 435 ATMs can now buy mutual funds and electronically pay bills for everything from mobile-phone fees and university tuition to Avon cosmetics. Within five years, the bank expects consumer business to account for fully a quarter of its revenue, compared with around 15% now.

Thai Farmers Bank has been more aggressive. Privatized by the Lamsam family in 1988 and run primarily by professional managers, the $20 billion (assets) bank launched an $80 million reengineering campaign three years ago that has boosted efficiency and made its 450 branches more customer-friendly. That enabled Thai Farmers to become the country's leading retail bank. Profits grew an estimated 32% in 1994, to $410 million, and UBS predicts they will leap at least 25% annually for the next three years.

Authorities figure they are doing the major Thai banks a world of good by forcing them to hustle. "Every bank will have to reengineer if it wants to survive," says Siri Ganjarerndee, assistant governor of the Bank of Thailand, the country's central bank. "Institutions that find the burden too heavy probably will have to merge." Nobody expects that an institution with the resources of Bangkok Bank will be among the casualties. But with the days of easy money coming to a close, the Sophonpanich dynasty will have to learn to fight on an increasingly level playing field.


-- Create five new commercial banks

-- License seven new foreign banks and allow existing players to expand operations

-- Permit finance companies to move into banking services, such as selling foreign exchange

-- Boost government supervision of bank dealing in foreign currency

-- Phase in new markets for futures and stock options over five years


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